Briefing Book

White House Conference

Robert M. Ball 7217 Park Terrace Drive Alexandria VA 22307 tel: 703-768-3438 / fax: 703-768-4744 Social Security Plus This plan accomplishes two goals. It restores Social Security to long-term balance, and it establishes a simple, effective way for individuals to set up savings accounts supplemental to Social Security. Part I: Steps to restore Social Security to long-term balance (1) Leverage the funds being paid into Social Security by workers, employers, and taxpaying beneficiaries by building an earnings reserve beyond what is needed for a pay-as-you-go system and investing part of the accumulating funds in private equities in a manner similar to that of other public and private pension plans. Under this approach, a contingency reserve sufficient to pay benefits for approximately one year would be invested solely in long-term Treasury bonds. Up to 50 percent of total accumulated funds would be invested (phased in between 2000 and 2014) in broadly indexed equities funds. A Federal Reserve-type board with long and staggered terms would have the limited functions of selecting the index and the portfolio managers and reporting to the nation on the overall operations of the plan. Social Security would not be allowed to vote any stock or in any other way influence the policies or practices of any company or industry whose stocks are included in the index. The increased revenues from investing part of Social Security's accumulated funds in equities would reduce Social Security's estimated long-term (75-year) deficit by more than half, from 2.19 percent of payroll to about 0.97 percent of payroll. (2) Modify Cost-of-Living Adjustments to reflect (a) announced or anticipated corrections to the Consumer Price Index (CPI) by the Bureau of Labor Statistics and (b) more frequent pricing of the CPI market basket. These changes reduce the long-term deficit by up to 0.45 percent of payroll. (3) Make the program universal by covering new hires in all state and local government jobs effective 10 years after enactment of Federal legislation. (About three-fourths of state and local jobs are now covered.) This change reduces the long-term deficit by about 0.18 percent of payroll. (4) Increase the maximum amount of annual earnings subject to Social Security tax and credited for benefits by 5 percent per year from 2000 through 2010 beyond the increase that would occur automatically under present law, thus raising the portion of taxable wages from 85 percent of payrolls in covered employment to the traditional 90-percent goal. This change reduces the long-tern- r deficit by about 0.58 percent of payroll. These four changes entirely eliminate the estimated long-term deficit of 2.19 percent of payroll, producing a small positive balance of 0.06 percent of payroll. Because it allows the trust fund to continue building and invests up to 50 percent of the build-up in private equities, earning greater returns than if invested solely in long-term Treasury obligations as required by present law, this plan in contrast to others is able to eliminate the deficit without benefit cuts or increased taxation of Social Security benefits, and without any tax rate increase (although the maximum taxable earnings base is raised). Proposed Steps to Restore Social Security to Long-Term Balance Expressed as a Percent of Payroll (Long-term deficit is assumed to be 2.19% of payroll, per Trustees' 1998 estimate) Proposed change: Reduces Deficit 1 Invest part of Social Security's accumulating funds in stocks - 1.22 2 Adjust COLA per BLS corrections to CPI plus more frequent market-basket pricing - 0.45 3 After 10 years, cover new hires in state and local government jobs - 0.18 4 Increase maximum earnings base to include 90% of covered payrolls - 0.58 Actuarial balance remaining after implementing all four changes: +0.06 [*] * Adjusted for interaction of changes Source: 1998 Trustees' Report and Office of the Actuary, Social Security Administration Part II: Establishing individual supplemental savings accounts through Social Security This plan provides a convenient and efficient way for wage-earners to add voluntary savings to Social Security, with their funds partially invested in the stock market, and without significant additional administrative costs or burdens for employers or government. Beginning in 2000, wage-earners could have employers deduct and forward up to 2% of the earnings covered by the Social Security maximum earnings base. The additional savings would be invested in the same way as Social Security's portfolio under this plan - 50% in stocks and 50% in Treasury bonds. Each year, when Social Security reports to all workers over age 25 on the estimated benefits they may expect (as required by the Moynihan amendment), Social Security would also report on the amounts accumulating in the individual's supplemental savings plan, and would remind workers of the availability of this convenient way to accumulate supplemental savings to help improve their economic situation in retirement or disability or to improve their survivors' protection in the event of death. For the first time, workers in small companies and lower- paid workers in general would have a real opportunity to build conveniently on top of their assured Social Security benefits and to participate in ownership of equities should they wish to do so. Accumulated savings could be distributed, upon eligibility for Social Security benefits, as an annuity, a lump sum, or in periodic installments. At death any undistributed amount would be part of the worker's estate. Rules governing tax status, early withdrawal, etc., would follow IRA rules. The essential principle of this plan, which can be expected to increase voluntary savings above the present national level, is that Social Security is in no way diminished to make room for a system of individual savings accounts. The individual accounts are entirely voluntary supplements - logical add-ons to a fully financed Social Security system providing a defined, assured basic benefit.